Fuel costs typically represent a large percentage of total expenditure for a business. Often, a business will require a significant volume of fuel to provide transportation of goods or services to and from customers or suppliers. Such transportation is an essential requirement for many businesses and fluctuating fuel costs present a risk to cashflow and profitability. Thus, the ability to accurately budget for the future fuel cost is of great importance.
Typically, the retail fuel price payable at a filling station is related to the underlying spot price of the fuel. The spot price can exhibit significant fluctuations due, for example, to changing reserve levels, production/extraction costs, level of demand, political and geopolitical factors, transportation costs, and taxation. Fluctuations in the fuel spot price are generally reflected in the retail fuel price paid by the customer at a filling station.
Fluctuating fuel retail prices pose difficulties for businesses, and in particular small to medium size businesses, where cash flow may be restricted or profitability may be adversely affected. It is therefore in the interest of a business to negate the effect of fuel price fluctuations as far as is practical.
In order to negate the effect of spot price fluctuations, fuel is often purchased and traded via future or forward contracts, whereby the contract price is set at the time the contract is purchased but delivery or payment is due at a time in the future. Whilst, future and forward contracts provide a means to fix the price of fuel in the future, therefore simplifying budgeting, the volume of fuel traded by a single contract is typically far greater than the volume of fuel required by a small to medium sized business. Therefore, small to medium sized businesses may be excluded from being able to take advantage of such facilities. It has been proposed, therefore, that small to medium sized businesses may be able to access such facilities if their fuel needs are aggregated; however, complex, expensive and potentially risky future and forward contracts are not always a preferred option.
An alternative approach to negating the effect of fluctuating fuel prices is to stockpile fuel in a bunker for use over an extended period. Generally, in such an approach, a large volume of fuel is purchased and stored in a tank and used to refuel vehicles when necessary. Whilst such an approach guarantees a fixed price for the volume of fuel purchased, additional storage and transportation costs are incurred, in addition to the dangers associated with storing a large volume of flammable fuel. Moreover, vehicles can only refill at the bunker location, thus losing the flexibility provided by a network of filling stations.
A further alternative solution adopted by many small to medium sized businesses is to use fuel cards offering discounted fuel at a network of filling stations. In this situation, the filling station would receive an agreed commission from the retail price, with the remainder going to a bunkering network which stores and supplies the fuel via a network of bunkers located at the filling stations. When a customer purchases or receives fuel (hereinafter termed a ‘fuel transaction’) from a filling station using an appropriate fuel card, the filling station notifies the bunkering network that the fuel transaction has taken place and the bunkering network updates account information relating to the customer on the basis of the fuel transaction. The account information may, for example, include data relating to historical fuel purchases, or a credit balance associated with the customer. Whilst these cards offer a saving over conventional purchasing of fuel, the user remains exposed to fluctuations in the retail fuel prices at the filling stations.